Is 'Oil Bubble" About to Pop?

The recent rise in oil prices to over $100 a barrell has been fueled largely by speculators, anaylsts say, hoping to hedge against the falling dollar and an unstable world situation - especially in the Middle East and South America.

The stunning price rise has been driven almost exclusively by investors who were bailing out of the dollar and other financial assets and pouring into commodities, Judith Dwarkin, chief economist at Calgary-based Ross Smith Energy Group, said yesterday.

“The fundamentals don't support prices at $80, let alone $100,” Ms. Dwarkin said. She said global demand growth has slowed in recent years, while spare capacity among members of the Organization of Petroleum Exporting Countries has expanded somewhat, even as inventories of gasoline are at robust levels.

“The greater prices diverge from what is fundamentally supportable, and the longer they stay at a distance from what is fundamentally supportable, the greater the risk of a correction, and a large one.” She has forecast an average price of $75 a barrel for this year.

Oil consumption in the developed world is dropping more sharply than anticipated just a few months ago because the subprime crisis has contributed to increasing economic weakness, Mr. Lynch said. Even emerging economies have slowed their demand growth in the face of record high prices, he added.

This speculative bubble, analysts say, may pop before summer due to increased gasoline stocks and a slowing economy.

At this point, any drop would be a welcome relief.

The recent rise in oil prices to over $100 a barrell has been fueled largely by speculators, anaylsts say, hoping to hedge against the falling dollar and an unstable world situation - especially in the Middle East and South America.

The stunning price rise has been driven almost exclusively by investors who were bailing out of the dollar and other financial assets and pouring into commodities, Judith Dwarkin, chief economist at Calgary-based Ross Smith Energy Group, said yesterday.

“The fundamentals don't support prices at $80, let alone $100,” Ms. Dwarkin said. She said global demand growth has slowed in recent years, while spare capacity among members of the Organization of Petroleum Exporting Countries has expanded somewhat, even as inventories of gasoline are at robust levels.

“The greater prices diverge from what is fundamentally supportable, and the longer they stay at a distance from what is fundamentally supportable, the greater the risk of a correction, and a large one.” She has forecast an average price of $75 a barrel for this year.

Oil consumption in the developed world is dropping more sharply than anticipated just a few months ago because the subprime crisis has contributed to increasing economic weakness, Mr. Lynch said. Even emerging economies have slowed their demand growth in the face of record high prices, he added.

This speculative bubble, analysts say, may pop before summer due to increased gasoline stocks and a slowing economy.